China: Communist Party controls wealth and big state owned enterprises

Beijing – Against a background of growing social protests caused by economic grievances, Chinese authorities are calling for a better society. Prime Minister Wen Jiabao vowed to make “society more fair and just." In its 12th five-year plan, the government plans for more “inclusive growth” that would give everyone a chance to profit from the country’s development. However, for well-known economist Willy Lam, such promises will remain moot without action against the privileges of state-owned enterprises (SOEs), which are directly managed by Communist Party officials.

SOEs enjoy monopolistic status in areas like oil and gas, minerals and power generation, banking and insurance, telecommunications and transportation, as well as aerospace and defence. Many of them are listed on stock markets, but the central government holds at least half of their shares.

In 2009, their combined assets of 21 trillion yuan accounted for 61.7 per cent of the country’s GDP. In the same year, they paid 1.15 trillion yuan in taxes; that is more than 17 per cent of total intake of central coffers. However, that is far less compared to their wealth.

In an article published in the China Brief report by the Jamestown Foundation, Lam pointed out that SOEs are theoretically under the strict control of the ministerial-level State Assets Supervision and Administration Commission (SASAC). Members of the board of directors as well as senior managers of these companies are appointed by SASAC in consultation with the CCP’s Department of Organization.

In practice, many of these giants seem a law unto themselves. A majority of their CEOs and top managers are senior party cadres some of whom sit on the CCP Central Committee as ordinary or alternate members. For example, Vice-Governor of Shanxi Province Li Xiaopeng, son of former premier Li Peng, headed the China Huaneng Group, an energy conglomerate. Li’s sister Li Xiaolin is chairwoman of China Power International.

The average salary of SOE employees is at least five times that of staff in the non-state sector. Earnings for top officials are also very large.

SOEs are run like private corporations, seeking to maximise profits. They made an estimated 1 trillion yuan ($150.83 billion) in net profits in 2010, or 50 per cent more than that of 2009.

In the first half of last year, the four state-held commercial banks alone raked in an average of 1.4 billion yuan ($211.16 million) a day.

Overall, they are not seen as having made substantial contributions to the well-being of ordinary Chinese. Even official media have called upon SOEs to share their wealth with the masses. “With profits of over 1 trillion yuan, yangqi (SOEs) should return their earnings to the people on a larger scale,” wrote the China Youth Daily.

Even so, experts note that they could earn fatter profits if only they could be more efficient and innovative. “Their ability to create value still lags behind world-class enterprises by a large margin," SASAC Vice-Chairman Huang Shuhe lamented

Partly in response to public outcry, the State Council (cabinet) on 28 December asked most central-level SOEs to pay larger amounts of dividends to the government. From 2011, the most profitable SOEs, including those in the oil and gas, tobacco, telecommunications and energy sectors, will have to pay 15 per cent of their post-tax profits to central coffers, up from the existing 10 per cent. SOEs in trade, construction, transport, mining and steel will be obliged to dole out 10 per cent of post-tax profits to the government, up from the current 5 per cent

How the authorities will use the extra cash remains to be seen, but experts point out that higher dividends for the government will not undermine SOE power. They also wonder why their profits are not used for the greater good.

Analysts note that instead of setting new standards in innovation and productivity, many state-held conglomerates have taken advantage of their huge war chests to make a killing in the red-hot real-estate market. In so doing, they are undermining the government’s attempts to rein in speculation.

To combat irrational exuberance in real estate, Beijing last March ordered 78 central-level SOEs to quit the property sector. So far, only nine have done so. Just last month, the CITIC Group doled out 6.3 billion yuan ($950.23 million) for a prime Beijing site. The net result has been that, increasingly, members of the middle and professional classes are being priced out of the real estate market.

For Nanjing University social scientist Shen Kunrong, a major reason behind the inequitable distribution of national income in China is "the existence of monopoly and unequal competition" as manifested by the SOEs’ privileged status.

For renowned economist and Peking University professor Li Yining, SOE privileges mean that non-state companies still suffer from discrimination in securing bank loans or in applying for public offerings in China’s two stock markets

In 2009, the combined earnings of just two SOEs, China Mobile and China National Petroleum Corp, was 218.55 billion yuan, exceeding by 600 million yuan the total profits of China’s 500 most viable private companies.